Sneak raid: Pensioners being charged tax on savings income they are yet to receive

Thousands of savers are being forced to survive on reduced incomes because of a bungled tax raid by HM Revenue & Customs.

Money Mail has received dozens of letters from pensioners who are being charged tax on savings income they are yet to receive.

They are being made poorer because the taxman has started deducting money from their monthly pension or salary to cover dues on what it thinks they get each month from savings interest. It does this by changing your tax code.

In reality, savers are being taxed before the savings interest hits their bank account. This is because savings interest is usually paid only once a year, rather than monthly.

It means pensioners have less to live on while they wait for their bank to pay out.

Many will be hundreds of pounds out of pocket for up to 12 months or until the savings interest cash arrives.

In the worst cases, it can take five years before interest from a fixed-rate bond can be withdrawn.

Savers such as Ian Clark, 69, are up in arms. The retired managing director of a textile company, who lives in Fife with his wife Margaret, says: 'The tax office does not appear to understand how this is affecting pensioners.

'I've had my tax code changed so tax due on our savings income is taken out of our pension each month, even though we have not yet received the interest.

'Our savings are in fixed-rate bonds that pay interest at different times of the year, but now we have to pay tax on them every month. It's common for us retirees to squeeze out what little interest is on offer on our savings by investing in fixed-rate bonds.

'Until pensioners can rearrange their finances, they'll have to dip into savings to cover their reduced pension — and lose interest on them. We're lucky we have a decent pension and a lot in savings. But it's still worrying that the Government can do this. You feel powerless.'

The bungled tax raid has come about due to new rules that came into effect in April. They were supposed to help savers by giving them an extra £1,000 tax-free allowance.

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Up until then, banks and building societies took the 20 per cent tax off your interest before it hit your account.

Now they pay without deducting tax. This means that if you receive less than £1,000 as a basic-rate taxpayer, or £500 as a higher-rate taxpayer, you need not lift a finger.

But if you are a taxpayer and earn more than the allowance, you have to pay up.

HMRC collects this tax each month from your pension by giving you a lower tax code.

Say you expect £1,200 interest from your bank or building society accounts to be paid on March 31 next year. As a 20 per cent taxpayer, you owe £240 tax on it (assuming that you've exhausted your £1,000 savings allowance).

Under the old system, you would have received £960 after tax in your account at the end of March.

Out of pocket: Ian Clark, a retired managing director of a textile company, pays tax on interest he is yet to receive

Under the new system, you'll get the full £1,200 with no tax deducted. When this is paid will depend on the terms of your account.

You'll pay the £240 tax at a rate of £20 a month from April 6, 2016 to April 5, 2017, deducted from your pension, regardless of whether you have yet received the interest on your savings.

This will cause a problem for many savers. For example, interest on NS&I's so-called pensioner bonds is paid out only when they mature.

The three-year 65+ Growth Bond paying 4 per cent interest would pay £400 a year on the maximum £10,000 invested.

A basic rate taxpayer would see £6.66 a month deducted from their salary or pension, despite not getting the interest until the end of the three-year term.

Graham Lewis, a retired tax officer from Cardiff, says: 'It is iniquitous that pensioners have to pay tax before they see their interest.

'HMRC is only changing tax codes because it's an easy way out of collecting the tax — otherwise you'd have to fill in a self-assessment form every year.'

A Money Mail reader from Wellingborough, Northants, who does not want to be named, says: 'Ironically, my pension is with HMRC. My tax code has been adjusted for my savings interest and I now get £661.04 every month, down from £727.44. That's a huge loss of £66.40 a month.

'I know I will get this tax back when the interest on my fixed-rate bonds is paid before tax. But my largest holding is with Kent Reliance, which pays out interest on April 5, 2017. I will be out of pocket for 12 months.'

Jackie Martin, 71, a retired translator from the West Midlands, says: 'Our walking group — who are all retired and in our 70s — have discussed the new tax rules and find it confusing, even though we understand financial matters.

'For pensioners like me whose income has been decimated in the past few years, a few pounds can make a lot of difference.'

An elderly reader from Chichester says: 'I live on a modest pension and have my savings in fixed-rate bonds. If HMRC keeps lowering my tax code, I won't have enough pension to live on.

'I can't take money out of my bonds to pay the tax without incurring a penalty.'

HMRC says: 'Changing an individual's tax code to collect tax due is a well-established means of collection that removes the need for many taxpayers to complete a tax return or contact us.

'If anyone believes they will pay too much or too little tax, they can get their code changed.'

For more information about tax codes, visit www.gov.uk/tax-codes or call HMRC on 0300 200 3300.

*Expected profit rather than interest as the bank follows Shariah principles. For current account rewards and interest conditions may apply eg. using provider's full switching service, min deposits and direct debits. For savings, access maybe limited, min/max deposits may apply. See T&Cs. Representative example: If you spend £1,200 at a purchase interest rate of 18.95% p.a. (variable) your representative rate will be 18.9% APR (variable).

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Pensioners left out of pocket after tax codes are switched in sneak raid